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Baby Boomers incentive to downsize – should you sell the family home?

Posted August 6, 2018 by MoneyLink

Last year the Federal Government announced a range of initiatives to tackle the issue of housing affordability. One of the big incentives laid out for Baby Boomers to sell the family home was the ability to make a significant one-off deposit into superannuation from the proceeds of sale.

Since July 1, the scheme has been in place. It allows homeowners over the age of 65 to use the proceeds from selling their homes to make a one-off deposit of up to $300,000 into their superannuation. The limit applies per person, meaning a couple can contribute up to $600,000.

An opportunity to downsize?

This incentive was designed to encourage older homeowners who still live in the family home to downsize, and, as long as they have owned the home for a period of at least 10 years, they can take advantage of the tax benefits of investing surplus money into super. The Government hoped, that by default, this would put a lot more suburban homes into the real estate market, providing more options for families.

For people over 65, the benefits of down-sizing into a smaller property like an apartment or townhouse and having less maintenance and lower home running costs are attractive. And so are the super contribution benefits of this scheme. The payment needs to be made within 90 days of settlement and it is possible for spouses of homeowners to claim the contribution, even if the house is owned in just one spouse’s name. The contribution can also still be claimed if ownership has transferred from one spouse to another due to death or divorce.

Normally, people over 65 face restrictions on voluntary super contributions, with earnings from contributions that are above the annual cap, taxed at a higher rate. But the downsizer contribution does not count towards contribution caps. What this means is that homeowners taking advantage of the scheme get a tax discount and could end up with more money in retirement.

It certainly is a great way for older Australians to top up their superannuation because not only is income within superannuation taxed at a lower rate, once you’re over 65 years of age, you can use the money in your super tax free – by withdrawing it as a lump sum or using it as an income stream.

Is downsizing right for you?

However, while this particular scheme could benefit older Australians who are asset rich and cash poor, every individual circumstance is different, and there are a range of rules regarding this initiative. So, it’s important firstly to check to ensure you’re eligible – there’s more information on the ATO website here. Then you need to get a property valuation and work through the numbers. If you’re selling the family home, will the costs of purchasing a new property, with stamp duty and moving costs make it worthwhile?

There’s a also possibility that this particular strategy could make you ineligible for the age pension because while the value of the family home is exempt in the asset test, cash and superannuation funds are not. There are also considerations if there are capital gains tax requirements on the family home when you sell – these can apply if you have been using part of the home as a business, or if you have been renting it out, either permanently or through a holiday letting platform like Airbnb.

It’s also important to consider whether now is the right time for you to liquidate this asset. For many baby boomers, the family home is the biggest asset. As such, the family home can be used in a number of ways to fund retirement, so it is worth getting personalised financial planning advice to work through the pros and cons of whether or not this is the right strategy for you. While it’s a good Government incentive, there are numerous other options that can also help to put you in a strong financial position for retirement.

If we can help, talk to us.

This is general advice and should not be treated as personal advice.
Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.

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